The rule of thumb for many Americans heading into retirement, is the 4% rule.
What is the 4% rule?
The 4% rule dictates that if one has a million dollars saved and that person takes out 4% annually, they will never run out of money, no matter how long their retirement lasts.
While the general rule is useful when it comes to making a savings target, in real life the rule is less concrete than some would like to admit. That's, according to the panel discussion at TheStreet's Retirement, Tax & Income Strategies symposium, hosted by Retirement Daily Editor Robert Powell.
The challenge with this rule is that it does not take into account the constant risks inherent in life. So, for instance, the constantly changing economy or even individual risks themselves.
"Expense risk in retirement planning is something we ignore a lot of times. The 4% rule says if you have a million dollars, you can spend 4% every year and never run out of money. But what it doesn't tell you is that 4% may not be enough to cover expenses," Dirk Cotton, author of the blog Retirement Café says.
The average retiree can expect to pay between $200,000 and $300,000 in medical expenses throughout their golden years.
"The basic problem with retirement services, they use simulations incorrectly, and people interpret results as concrete. People use those tools that make ridiculous assumptions thinking that they will have a set amount of money to spend annually," Cotton said.
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